With globalization continuing to open up the Philippine economy to

foreign trade and investment, the practice of sending employees to

affiliates abroad either on a short- or long-term basis is becoming
more common. Not only does it facilitate the learning and
development of employees, it also allows firms to build a reputation as
a good employer, eventually attracting more investors, business
partners, and new employees.

However, a concern now is the tax implication for those Filipino

employees who are on overseas assignment.
The critical factor here is whether the employee is a resident or
nonresident citizen of the Philippines. Under the Philippine Tax Code,
resident citizens are subject to tax on income earned within and
outside the Philippines. On the other hand, nonresident citizens are
subject to tax only on income earned within the Philippines.

Section 22 of the Philippine Tax Code defines a nonresident citizen as

follows:

A citizen of the Philippines who establishes to the satisfaction of the

Commissioner of Internal Revenue the fact of his physical presence
abroad with a definite intention to reside therein

A citizen of the Philippines who leaves the Philippines during the

taxable year to reside abroad, either as an immigrant or for
employment on a permanent basis

A citizen of the Philippines who works and derives income from

abroad and whose employment thereat requires him to be physically
present abroad most of the time during the taxable year

A citizen who has been previously considered a nonresident citizen

and who arrives in the Philippines at any time during the taxable year
to reside permanently in the Philippines shall likewise be treated as a
nonresident citizen for the taxable year in which he arrives in the
Philippines with respect to his income derived from sources abroad
until the date of his arrival in the Philippines.

Advertisements
Prior to the passage of the above provision defining a non-resident
citizen, Section 2 of Revenue Regulations (RR) No. 01-79 dated 8
January 1979 enumerated those who are considered non-resident
citizens. A non-resident citizen shall establish to the satisfaction of the
Commissioner of Internal Revenue the fact of his physical presence
abroad with the definite intention to reside therein. The term ‘non-
resident citizen’ shall also apply to any Filipino who leaves the
country during the taxable year as:

Immigrant—one who leaves the Philippines to reside abroad as an

immigrant for which a foreign visa as such has been secured

Permanent employee—one who leaves the Philippines to reside

abroad for employment on a more or less permanent basis

Contract worker—one who leaves the Philippines on account of a

contract of employment, which is renewed from time to time within or
during the taxable year under such circumstances as to require him to
be physically present abroad most of the time during the taxable year.
To be considered physically present abroad most of the time during
the taxable year, a contract worker must have been outside the
Philippines for not less than 183 days during such taxable year.

Apparently, the current Section 22 of the Philippine Tax Code was

derived from the above-defined ‘contract worker’. Stated otherwise, to
be a non-resident citizen, one must leave on account of a contract of
employment under such circumstances that require him to be
physically present abroad most of the time.

Meanwhile, in Section 2 of RR No. 1-79, the term “most of the time”

was construed as presence outside the
Philippines for more than 183 days during the taxable year. These
provisions have been the bases of Bureau of Internal Revenue (BIR)
rulings stating that the income of Filipino employees who are assigned
abroad are not taxable in the Philippines, being a non-resident citizen,
under either of the following premises:

Employees who are registered with the Philippine Overseas

Employment Administration (POEA) are considered Overseas
Contract Workers (OCWs), regardless of the number of days spent
abroad during the taxable year.

Employees who are not registered with the POEA but who are
physically present outside the Philippines for not more than 183 days
during the taxable year.

In relation to this, in BIR Ruling [DA-(I-003) 081-09] dated 16

February 2009, the BIR confirmed that an employee who was
assigned abroad and stayed therein for more than 183 days during the
taxable year is considered a non-resident citizen who is taxable only
on income derived from sources within the Philippines. It was further
clarified that although the employee’s compensation income was paid
by the entity in the Philippines, the same shall still be considered
derived from outside the Philippines since the situs of taxation is the
place where the services are rendered regardless of the manner of
payment. This has been the consistent ruling of the BIR regarding
Filipino employees working abroad.
Looking at the provisions of the Philippine Tax Code and as
interpreted by previous BIR rulings, it can be inferred that the 183-day
rule was used in determining the non-residency status and eligibility
for tax exemption of a Filipino regardless of where the salary will be
paid. This is based on the principle that the situs of the income derived
from services performed by a taxpayer is the place where said
taxpayer performed such services.

However, in BIR Ruling No. 517-11 dated 22 December 2011, the

BIR held that a local company’s employees assigned to render
services abroad who were present in the foreign country for more than
183 days do not qualify as non-resident citizens and are thus subject to
Philippine income tax in relation to their compensation income from
their assignment abroad.

In this ruling, the BIR held that the employees cannot qualify as non-
resident citizens because they remained employees of the local
company, despite their overseas assignment. They were still under an
employer-employee relationship with the local company and the latter
had the right to control and direct the individual with regard to which
services will be performed, what targets have to be accomplished, and
ultimately, it is the entity that receives the benefit of the services.
Accordingly, the compensation received by the employees still
pertained to their employment with the local entity, which should be
subject to withholding taxes on compensation. In this ruling, emphasis
was given on who holds the employment contract and who pays the
payroll costs in order to determine taxability.

Recently, the BIR issued a ruling concerning a government employee

who was appointed to a post in the Association of Southeast Asian
Nations (ASEAN) Secretariat that had her holding office abroad for a
period of three years with no intention to reside therein either as an
immigrant or on a permanent basis. The worker continued to be
employed by the Philippine government agency while her
remuneration and other benefits were shouldered by the ASEAN
Secretariat.

The BIR considered her resident citizen who is taxable on all income
derived from sources within and outside the Philippines. In its ruling,
the BIR held that while the employee stayed abroad for more than 183
days, the employee cannot qualify as a non-resident citizen because
she remained employed locally. The BIR further clarified that for
someone to be considered a non-resident citizen, the Tax Code not
only requires presence of more than 183 days outside the Philippines,
but also that the employee works and derives income from abroad and
is “employed thereat.”

The term “employed thereat” was interpreted by the BIR as requiring

a foreign employment contract. Impliedly,
a mere secondment of an employee, regardless of the length of term,
would not satisfy the condition of having an “employment thereat.”
This new interpretation of the BIR has serious implications to the
increasingly global Filipino employees who are now faced with
having to pay taxes both abroad and in the Philippines.

Aside from promoting the global mobilization of employees,

taxpayers and employers should also consider the provisions of
secondment agreements and its impact on the tax obligations of both
the employee and the employer. This will guide taxpayers on the
appropriate remittance of taxes on income earned from work abroad.

The author is an assistant manager with the tax and corporate services
division of Navarro Amper & Co., the local member firm of Deloitte
Southeast Asia Ltd. – a member firm of Deloitte Touche Tohmatsu
Limited – comprising Deloitte practices operating in Brunei,
Cambodia, Guam, Indonesia, Lao PDR, Malaysia, Myanmar,
Philippines, Singapore, Thailand, and Vietnam.